BRITAIN’S ECONOMY THE “TEMPORARY” SURCHARGE LIKELY TO LAST TWO YEARS

Press, Volume CIV, Issue 30946, 30 December 1965, Page 8

BRITAIN’S ECONOMY THE “TEMPORARY” SURCHARGE LIKELY TO LAST TWO YEARS

I By

"Lynceus”

of the ''Economist'’)

(From the “Economist” Intelligence Unit!

It now seems virtually certain that the “temporary” British import surcharge, which caused such an international fuss a g » ‘ * for two years—at least. The chances are heavily < g ■ g . moved before November 1966, and another cut in the late— 10 pei cent since April this year—can also be ruled out.

When Britain’s trading partners realise this, will they create another rumpus? Will the European Free Trade (Efta) countries in particular, who obtained the April cut from the original 15 per cent, regard Britain as breaking its trading promises—can you call two years temporary? Or do they now agree that Britain needs this protection if it is to stand any chance of fashioning a competitive economy, able to withstand sterling storms without record breaking loans? It could be that they do now think this. They have been pretty quiet about the surcharge lately. It is seen no longer as a mortal blow to Efta and freer trade generally but as a temporary setback, even if it has had to last much longer than Britain's new Government dared to admit a year ago. Import Bill Cut The experience of that year has shown the value of the surcharge to Britain, it did not actually reduce the massive volume of imports flowing into Britain—the main reason for the record payments deficit —but it has cut down drastically the rate at which they were increasing. The Government hoped that the surcharge would save £l5O-200 million a year on Britain’s import bill and this is about what has happened. It has not wiped out the £756 million total deficit—it obviously couldn't—but it has helped a lot, especially as a quick-working check while other longer term remedies could be marshalled.

Perhaps too the British Government—and others—have learned something from this necessary but temporarily retrograde step. They may, for instance, have been dismayed at first by the 20 per cent jump in chemical imports, despite the surcharge. But they should not have been. After the surcharge the chemical industry exported £l6O million worth of goods more than it imported. If the surcharge had been effective in keeping out the chemicals British industry needed from abroad, it would have penalised the British economy not salvaged it.

Specialist Products

Still more important, there is the question of trade in specialist products. This involves a criticism of Britain’s surcharge that its trading partners will not press, because Britain is the one’ who suffers; exporters to Britain are unaffected. It is a point which the Labour Government probably did not think of in its first hectic days. Or, if it did, it may have thought

it was administratively difficult to do anything about it. Within a week of the surcharge being levied one British chemical engineer was in Switzerland buying plant not obtainable anywhere else in the world. It was expensive, but it was highly efficient; and no other plant could da what this could do. He had to buy it to remain competitive. The import surcharge put £90,000 on the price but he bought it all the same. The same goes for a great number of other specialist technical products, especially machine tools. Price plays a small part in the decision whether to buy them or not, perhaps no part at all. Performance, design and sheer availability are much more important, as was made clear by post-surcharge inquiry into why British firms imported instead of buying British. Where the product is essential for efficiency and competitiveness, and when it is not obtainable at home, putting an import surcharge on it does not deter the buyer, it just adds to his costs, maybe increases his prices and so ultimately defeats the purpose of the whole exercise. At the bottom this is only another argument for free trade. And freer trade is what Britain is slowly struggling towards. But even when they had to take a “temporary” step backwards the Government might have tried to exempt from surcharge technical products which Britain was going to buy anyway.

Where Britain is turning out products similar in kind and quality to those of competitors abroad, the surcharge gives them a degree of protection which is precisely the reverse of the treatment British industry should have. Here again the surcharge .s at odds with Britain's longterm objectives. The Conservative party, before it left office seemed more and willing to subject British industry to the chill but invigorating winds of competition, but it did little. The Labour Government has a mixed record Till recently it was much too preoccupied with the immediate battle over external payments to give time to the longer time question of tariff cutting. Cautious Movement But that is what the British economy will ultimately need. The sooner, therefore, the surcharge is removed the sooner can that stage be begun. But that stage has not been reached yet. The measures to promote exports and encourage (some) import substitution must be seen to have had some consistent results before the protective surcharge can be dismantled. And if that is before November next year it will be very surprising. The Government is bound to be on the cautious side about this. Having nearlybeen roasted by a sterling crisis—and bitterly criticised for its surcharge into the bargain—it will be understandably chary of exposing itself to the fire again.